On 1 June 2021, the Kingdom of Netherlands and Cyprus signed the double tax treaty for the avoidance of double taxation (the “treaty”), which was published in the Official Gazette on 4 June 2021, the date of ratification by Cyprus.
The Treaty follows the model treaty of the Organisation for Economic Co-operation and Development (OECD) containing the standard provisions, to avoid double taxation of income and capital, which are briefly outlined below:
The withholding tax on dividends paid to the other contracting state is 15%, except in the following two instances for which no withholding tax (WHT) is imposed if:
- the beneficial owner (BO) is a company that holds directly at least 5% of the capital of the company paying the dividends, throughout a 365-day period that includes the day of the dividend payment;
- the dividends paid are paid to a recognized pension fund which is generally exempt under the Cyprus Corporate Income Tax law.
There is nο withholding tax on interest, as long as the recipient of the interest is the beneficial owner of the income.
There is no withholding tax provided that the recipient of the royalties is the beneficial owner of the income
- Cyprus maintains the exclusive taxing rights on gains arising from the disposals of shares made by Cyprus tax residents, except in the following cases:
- Disposal of non-listed shares or comparable interests which derive more than 50% of their value directly or indirectly from immovable property situated in the Netherlands, and
- Disposal of shares deriving more than 50% of their value directly or indirectly from: – rights to assets produced by exploration or exploitation of the natural resources located in the Netherlands, including the exploration or exploitation of the seabed or its subsoil and rights relating to the production of energy from water, sun and wind; – technical equipment or other similar property situated in the Netherlands and directly used in offshore activities. The treaty includes a specific article (Article 26) limiting the entitlement to benefits under the treaty. More specifically, the Tax Authorities are entitled to deny the application of treaty benefits if the obtainment of such benefit was one of the principal purposes of the relevant arrangement/transaction, unless the granting of such benefit would be in accordance with the object and purpose of the treaty.
- Gains form the disposal of immovable property are taxable at the country where the property is situated
- Gains from the disposal of movable property which is part of the ownership of a permanent establishment are taxable at the country where the permanent establishment is based.
- Gains from the disposal of ships and aircrafts used in international aviation are taxable at the country where the real seat of the owning company is situated.
In order to implement the Base Erosion and Profit Shifting (BEPS) measures on dispute resolution and anti-tax avoidance, the treaty contains a Mutual Agreement Procedure (MAP) to resolve disputes (including dual tax residency of entities) and introduces a principal purpose test (PPT), which allows tax authorities to disallow the application of treaty benefits if the application of those benefits was one of the principal purposes of an arrangement or transaction.
The treaty, although signed by both countries, has not been entered into force, since the legislation will need to be formally adopted by the Dutch Parliament. It is submitted that the the Treaty may come into force in 2022, so long as ratification and notification procedures are finalized by both countries before 1st of December.